Inflation rate vs option trading

Discussion in 'General Discussion' started by stevegee58, Feb 6, 2017.

  1. stevegee58

    stevegee58 Well-Known Member

    I was thinking about how we're able to trade index option spreads profitably in the current environment of low interest and low inflation. Then I remembered
    1980 the year I started work out of college when the inflation rate was 13.58% (http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx). Somehow people were able to buy houses (with 15% mortgages!), buy food, gas etc.
    My question is: what would happen to strategies like the RTT in a high interest, high inflation regime? What happens to IV, option premiums, stock prices?
     
  2. ACS

    ACS Well-Known Member

    I'm not sure there is an easy answer to that question. The last time that interest rates and inflation were high, the options market was not nearly as developed and sophisticated as it is now. Before the 1987 crash people sold puts for "free money" and the skew was completely different. I can tell you that I just finished a back test of a BWB strategy and the years 2010-2012 where volatility was higher but not extreme produced much better results than 2013 to the present where volatility has been lower. Look at a chart of the VIX and you can see the change at the end of 2012 where it was generally above 15 before and since early 2013 has spent a lot of time below 15. I would welcome a more two sided market where stocks didn't go relentlessly higher with the occasional brief sharp correction.
     
  3. Edward

    Edward Well-Known Member

    The famous theoretical Black-Scholes option pricing model equation includes market interest rate.
     

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